Lower Goods and Services Tax (GST) rates are expected to provide a meaningful boost to credit demand across the economy, supporting steady growth in bank lending over the next two financial years, according to a report by Motilal Oswal Financial Services (MoSL).

The brokerage estimates that overall system credit growth will moderate to around 12% in FY26 before accelerating to 13% in FY27, driven by improved affordability, reduced tax burden, and a pickup in consumption demand following GST rate reductions.

Improved Cash Flows to Encourage Borrowing

MoSL notes that lower GST rates ease cash flow pressures for both households and businesses. With more disposable income and better working capital availability, borrowers are likely to display greater confidence in taking on credit, leading to sustained demand across multiple segments.

This improved financial flexibility is expected to translate into higher utilisation of loans, particularly in consumption-linked areas.

Retail and Services Credit in Focus

The report highlights that credit deployment toward retail consumption and services has been prudent so far and stands to benefit further from the tax cuts. A favourable demand environment, coupled with stable asset quality and adequate capital buffers within the banking system, is expected to underpin continued expansion in retail lending.

Banks are also well positioned to support growth, given their healthy balance sheets and controlled credit risk.

Corporate Credit Recovery to Be Gradual

While corporate credit growth may remain subdued in the near term as the economy adjusts to the new tax regime, MoSL believes that lower input costs and improved profitability could gradually revive borrowing appetite among companies.

As margins improve and business confidence strengthens, demand for corporate loans is expected to pick up over time.

Long-Term Implications for Banking Sector

Overall, MoSL views GST rate reductions as structurally positive for the credit cycle. By supporting consumption, improving business cash flows, and maintaining financial stability within the banking system, tax cuts are likely to have a favourable long-term impact on bank lending and broader economic growth.

Summary

Motilal Oswal Financial Services expects lower GST rates to act as a catalyst for sustained credit growth in the coming years. System credit growth is projected at 12% in FY26 and 13% in FY27, supported by improved affordability, stronger consumption demand, and stable banking fundamentals. While corporate credit recovery may take time, the overall outlook for bank lending remains constructive as tax cuts support economic expansion.

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